Iran war could shake Bangladesh economy like an earthquake

When tensions escalate among global and regional powers, the shockwaves ripple through oil markets, shipping lanes, labour migration routes, and financial systems, reaching economies thousands of kilometres away.

The US-Israel war on Iran is rapidly emerging as one of the most significant geopolitical crises for the global economy in recent years, sending tremors through markets and supply chains.

Although the fighting is roughly 4,000 kilometres from Bangladesh, economists say the impact could be substantial for a nation heavily reliant on imported fuel and remittances from workers in the Middle East.

According to economists, the crisis due to the war risks setting off a chain reaction: rising energy prices, disrupted trade flows, weakened export competitiveness, turmoil in the migrant labour market and remittance inflows, higher inflation, and renewed pressure on foreign exchange reserves amid a constrained fiscal space.

Zahid Hussain, former lead economist of the World Bank’s Dhaka office, said Bangladesh’s economic exposure could unfold through three channels: energy, the dollar, and trade and finance.

He compared the potential shock of the war to an earthquake rather than a passing storm.

A storm passes temporarily, Hussain said. “Water rises and then recedes. Some damage happens, but the situation stabilises. But an earthquake damages the underlying infrastructure, affecting both life and property.”

The economist said the scale of the impact will depend on both the intensity and duration of the war.

“The key question is not only the magnitude of the shock, but also how long it lasts. The longer it continues, the greater the damage,” he said.

ENERGY SHOCK LOOMS

The most immediate and potentially severe impact of the Iran war is on global oil markets, with the price surging to $119 as of yesterday compared to around $72 per barrel a year ago.

The Gulf region sits at the heart of the world’s energy supply chain.

Following last week’s US and Israel’s attack on Iran, Tehran blocked the Strait of Hormuz, a crucial maritime route, seriously disrupting cargo transport between the Middle East and Bangladesh.

Major shipping lines have suspended cargo bookings between the Indian subcontinent, including Bangladesh, and the Gulf.

For Bangladesh, the consequences could be painful.

The country imports almost all its fuel -- from crude oil to refined petroleum and liquefied natural gas (LNG). A spike in oil prices would immediately inflate the country’s energy import bill.

Long queues have already appeared at fuel stations across the country as panic buying spreads, while the government has closed universities and introduced fuel rationing to cushion the fallout.

Higher fuel prices would also increase costs for electricity generation, transportation, and industrial production.

In that case, the government, already struggling to manage energy subsidies, would face difficult choices: absorb the cost through larger subsidies or pass it on to consumers through higher fuel and power prices.

Both carry economic consequences, such as rising subsidies straining public finances, while higher domestic energy prices push up living costs and production expenses.

INFLATION COULD GO WILD, AGAIN

Energy shocks rarely stay confined to the power sector; instead, they ripple through the entire economy.

Bangladesh has been struggling with stubbornly high inflation for around three years. Inflation was above the 9 percent mark from March 2023, easing slightly in 2025, and showing a resurgence recently.

The drivers for renewed price pressure include high food prices, currency depreciation, and rising import costs.

A further rise in global oil prices would amplify these pressures by raising transport and logistics costs across supply chains.

Higher fuel costs affect everything from agricultural irrigation to the distribution of essential commodities, potentially pushing food inflation higher and squeezing household purchasing power.

This dynamic could leave the economy facing elevated inflation alongside slowing growth.

After months of easing, headline inflation reached a 10-month high in February due mainly to rising food prices, according to the Bangladesh Bureau of Statistics (BBS).

FOREIGN EXCHANGE UNDER STRAIN

Energy imports are one of Bangladesh’s largest sources of foreign currency outflows. A prolonged rise in oil prices would add pressure on the country’s foreign exchange reserves.

Bangladesh has previously faced periods of reserve stress due to high import bills and currency volatility. Another energy shock could widen the current account deficit, increasing the cost of fuel imports.

As demand for dollars rises, the Bangladeshi taka may face renewed depreciation, further raising the domestic price of imported goods and reinforcing inflation.

REMITTANCE RISKS

Bangladesh’s large migrant workforce in the Middle East is another vulnerability. Since fiscal year 2025, around 86 lakh Bangladeshi workers have gone abroad for jobs, with Saudi Arabia employing nearly half.

Middle Eastern countries, including Saudi Arabia, Oman, Qatar, the United Arab Emirates, and Kuwait, account for around 75 percent of overseas employment, according to the Bangladesh Economic Review 2025.

If the conflict escalates, economic activity in the Gulf could slow, threatening employment for migrant workers and reducing remittance inflows.

Even a moderate slowdown would put additional pressure on Bangladesh’s external balance, as remittances play a crucial role in offsetting the country’s large import bill.

The war could also disrupt global trade routes. During geopolitical tension, shipping companies often raise insurance premiums, and freight rates increase if vessels reroute to avoid conflict zones.

For Bangladesh’s export-oriented industries, particularly the ready-made garment sector, higher logistics costs could reduce competitiveness. Importers would also face higher charges for essential commodities, machinery, and industrial inputs, feeding through into domestic prices.

Bangladesh’s energy system remains fragile. Power generation depends heavily on imported fuels and LNG.

Tight global gas markets or surging LNG prices could make affordable supply difficult, leading to potential power shortages or higher generation costs. Such disruptions could affect industrial production, especially in energy-intensive sectors such as manufacturing and textiles.

“The first risk is energy, both in terms of price increases and availability,” said economist Hussain.

“Even if you are willing to pay a higher price, you may not be able to secure supply. If energy supply is disrupted, the real economy, agriculture, industry and services, comes under risk,” he added.

The economist also warned of mounting pressure on the US dollar. “As global uncertainty rises, the dollar strengthens and our import bill increases,” Hussain said.

“Even if the volume of imports does not rise, the total bill will increase, meaning we will have to spend more local currency to buy the same amount of dollars. That will further fuel inflation.”

A stronger dollar could complicate external payments.

“When dollars become scarce, settlement of outstanding payments becomes difficult, and payment obligations start to accumulate,” he said, adding that this could create pressure on banks’ balance sheets and the government budget.

The third channel is trade and financial flows, particularly higher logistics costs.

“Freight charges, port costs and insurance premiums are already rising, which increases payments under the services account of the balance of payments,” Hussain said. “Individually, these costs may seem small, but collectively they create significant pressure.”

He also flagged risks to remittance flows.

“There are two risks for remittances. First, employment and wage risks for migrant workers if the conflict spreads, and second, possible disruptions in payment systems that could affect money transfers,” he said.

“The external balance, financial sector and energy supply are all exposed, and their combined impact will eventually affect the real economy -- growth, employment and wages,” Hussain added.

BANGLADESH NEEDS A CONTINGENCY PLAN

Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said Bangladesh should prepare a contingency plan to deal with emerging risks.

“We need to think about how to use the foreign financing already in the pipeline so that pressure on foreign exchange reserves remains limited,” he said. Once these funds arrive, they could add several billion dollars to reserves, easing external pressure.

Rahman also called for mobilising additional support, including budgetary assistance from institutions such as the World Bank.

“If fuel import costs surge, it will be very difficult to manage through reserves alone,” he said. “In that case, we may need financing arrangements such as import credit facilities from institutions like the Islamic Development Bank. Preparing a contingency plan in advance would be a prudent step.”

Finance Minister Amir Khosru Mahmud Chowdhury, when asked about the potential impact of the war and whether austerity measures were being considered, did not provide a detailed response.

“We are working on this issue,” he told The Daily Star.